Monday, 10 April 2006

When I wrote about Boot Camp Thursday, I started by observing
that while I and many others were initially shocked by Apple’s
announcement, it only took a few hours before the idea seemed
completely obvious and not really surprising at all.

Boot Camp has opened the door for a lot of additional speculation
regarding what this means going forward for Apple. I think it’s only
fair for me to go on the record regarding which of these ideas
really would be shocking, if they were to come to pass.

Regarding anything related to Apple’s strategy going forward, it’s
essential to keep in mind just how Apple functions as a business.
It’s not very complicated. Apple now has two fundamental businesses:
selling Macintosh computers and selling iPods. And I think if you
wanted to, you could argue that this is really one core business,
selling computers, and that some of their computers are Macs and
some are iPods.

I’m not offering this as anything other than a statement of the
obvious, but it’s apparently not so obvious to many of the pundits
speculating on Apple’s future plans.

Selling hardware is their business. That’s where their revenue comes
from, that’s where their profits come from, and revenue and profit
is what defines a business. Everything else they do is in support of
this core business. Apple is famous for its software — both the Mac
OS and their own Mac applications — but they make way less money
selling Mac software than they do selling Mac hardware. And the
iTunes Music Store is just the equivalent of “software” for iPods.

And so that’s the prism through which one needs to view Apple
speculation. For any idea, ask yourself this: Would it help Apple
sell more Macs or more iPods? If the answer is “no”, Apple isn’t
going to do it, or, if they do, it’d be a genuinely shocking
development.

All Apple needs to do to be spectacularly successful with its
computer business in the next few years is to take just a few
single digits of market share away from Windows.

But that doesn’t actually quite make sense, because “Windows” — or
the company behind it, Microsoft — doesn’t actually sell PC
hardware. If Apple is going to grow a few extra percentage points of
computer hardware unit sales, those points must come at the expense
of PC makers.

If this growth is driven by Boot Camp (and/or Parallels Workstation,
or VMware for Mac, or an Intel-native version Virtual PC, or any
other means of running Windows on Mac hardware), Microsoft may not
even “lose” anything at all, because customers driven to the Mac for
this reason must also buy Windows if they want to run it.

Boot Camp doesn’t pit Mac OS X against Windows, and so it doesn’t
pit Apple directly against Microsoft. What Boot Camp does is pit Mac
hardware that can run both Mac OS X and Windows up against all
other PC-hardware that can only run Windows.1

Apple Is Going After the Profits, Not the Mass Market

If Apple takes a few additional market share points, it will be at
the expense of companies like Dell, Toshiba, Lenovo, and Sony.
What’s essential to note is that they’re not just going after any
and all of the PC market — they’re going after the high end, which
is to say, the profitable end.

As I’ve said many times before (too many, in fact), the consumer
PC market has, like other consumer markets before it, split into
two basic segments: buyers of commodities, and buyers of premium
goods. The money’s in serving the latter. That’s why, for
instance, Dell just bought Alienware.

In reference to my line that “Instead of choosing between a Windows
PC or a Mac … you now get to choose between a computer that can
only run Windows or a computer that can run both Windows and Mac OS
X,” Carr continues:

I think that’s the reason the Apple’s stock price has shot up
nearly 20% since the Boot Camp announcement yesterday. It’s not
that Apple may be able to expand its general market share by a
couple of percentage points; it’s that those percentage points are
likely to represent many of the most attractive customers in the
market.

And that’s Apple’s strategy in a nut.

What would be interesting would be to see computer manufacturers’
“market share” computed in terms of profits, rather than unit sales.
Apple almost certainly makes more profit from a $600 Mac Mini sold
through one of its own stores or Apple.com than eMachines does from
a $500 POS PC sold at Wal-Mart. But in terms of “market
share”, they each count as one computer sold.

Whatever Apple’s “profit share” of the PC industry, it must be much
larger than its 2-5 percent market share. And Apple’s strategy seems
clearly geared toward ramping up profits, not just unit sales.

Why Apple Isn’t Going to Release Mac OS X for Other PCs or License the Mac to Other PC Makers

One contrary view to Apple’s Boot Camp announcement, espoused both
by Paul Boutin in Slate Friday and Robert X. Cringely in an
op-ed Saturday in The New York Times, along with numerous
other pundits and webloggers high on Boot Camp fumes, is that Boot
Camp isn’t bold or important at all, and that what Apple really
ought to do is release a version of Mac OS X for generic PC
hardware. As Boutin puts it:

Instead of a disk that allows you to boot Windows on a Mac, what
about a disk that lets you boot OS X on any Intel-powered PC? I
don’t want Windows on a Mac. I want OS X on a PC.

The reason this isn’t going to happen — at least not soon — is
that it doesn’t fit with Apple’s aforementioned business, selling
computer hardware. Boot Camp fits because it makes it more likely
that more people will buy Mac hardware, and doesn’t make it any more
likely that existing Mac users will switch to buying computers from
some other company.

Cringely writes:

This strategy would turn Boot Camp on its head, as the company
selling all those $140 [sic] retail copies of its operating
system would be Apple. And with hundreds of millions of Windows
machines in the world, getting even 1 percent of PC users to
switch to OS X would be a huge new business for Apple. It would
also create another headache for Microsoft. And that, in the
end, is what Apple does best.

The problems with this logic are manifold. For one thing, gaining
one percent of the market by selling one percent more of the total
computers would be way more profitable than selling that many $130
copies of Mac OS X.

According to Apple’s quarterly financial statements, the
company in recent years has consistently hit gross profit margins a
tad over 25 percent. Apple does not (publicly) break these margins
down on a product-by-product basis, but I think 20-25 percent is a
reasonable estimate of their profit for most of their big-ticket
products.

So, let’s say today Apple makes $500 in profit on a $2,500 MacBook
Pro. Tomorrow, in Boutin’s and Cringely hypothetical world where
Apple sells $130 copies of Mac OS X for any PC, they might make
about $100 in profit when someone buys a Sony Vaio and a copy of Mac
OS X.

Cringely’s statement that “getting even 1 percent of PC users to
switch to OS X would be a huge new business for Apple” ignores the
fact that it might also completely sabotage Apple’s existing and
very profitable business of selling Macintosh computers. Cringely
seems to be making the assumption that everyone who’s currently
using Apple hardware would keep buying Apple hardware, and that
these retail copies of Mac OS X that run on generic PCs would be
sold only to new customers.

If that were the case, sure, it would only add to Apple’s success.
But that wouldn’t be the case. There can be no doubt that many
current Mac users would buy other-branded hardware, costing Apple
hundreds of dollars in profits. To make up for each such loss, Apple
would need to gain three, four, or maybe even five new customers.

That’s not to say all Mac users would abandon Apple hardware. But
hundreds of thousands would, and Apple would need to gain millions of
new switchers just to compensate for that lost revenue and break
even; otherwise they’d lose money on the endeavor, even while
gaining many more users of Mac OS X.

Boutin clearly recognizes that this would in fact happen:

Face it, most of your time at the computer is spent interacting
with the operating system and applications, not admiring the case.
OS X is an excellent operating system, with a lovely, soothing
interface that doesn’t wriggle like a bug. Why not run it on the
cheapest computer you can get? If you cracked open a new Mac and
took stock, you’d realize you could buy the same computer much
cheaper by ignoring its packaging. Once you got rolling on e-mail
and Web surfing, you might even forget what your PC looks like.
What matters is what’s onscreen.

Leave aside for this discussion the fact that you can’t actually
get a comparably-equipped computer from any other company for
that much less than Apple’s current Intel-based Mac line-up —
you can get much cheaper computers, sure, but not much cheaper
computers with comparable components. The point here is that
Boutin is right that what matters most is what’s on-screen.

Unlike Cringely, Boutin even acknowledges that Apple tried something
like this a decade ago:

Sound crazy? Apple actually tried this, allowing other
manufacturers to produce “Mac clones” for two years during Steve
Jobs’ absence from the company. “The styling of the Mac clones
often more closely resembled that of a PC,” Wikipedia notes
accurately, “but the clones frequently offered a lower price and
sometimes better performance.” Bill Gates himself proposed the
idea in an earnest 1985 letter to then-Apple CEO John
Sculley shortly after Jobs’ ouster. Sculley passed on the idea,
leaving a successor to try it, perhaps in desperation, 10 years
later. Jobs killed the clone program when he retook the helm in
1997. He’s since locked Apple’s software into one
different-thinking hardware product after another, from the
original iMac to the iPod nano.

But Boutin’s claim makes it sound like Jobs killed the Mac cloning
program out of spite. Wrong. Jobs killed the cloning program because
it was killing Apple Computer financially. Recall that during the
Mac clone era, most of the mainstream press coverage of Apple
centered around speculation that the company was on the verge of
collapsing into bankruptcy. Apple did not profit from the cloning
program, for the same reasons outlined above: many Mac users
switched from buying Apple hardware to clone hardware, and Apple
made much less money from Mac OS licenses than it did from selling
Mac hardware, and there was nowhere near enough growth in the user
base to make up the difference.

It’s just not true that most Mac users use Macs because the hardware
is better designed. They’re Mac users because of the Mac OS. What
the original cloning program showed was that many of Apple’s
customers were Mac fans, not Apple fans.

Now it’s true that Apple’s current industrial design is far better
than that of typical cut-rate PC makers, and aesthetically it’s even
further ahead today than it was a decade ago, when Apple itself was
still making “beige boxes”, albeit nice beige boxes. But it’s not
that much better than other high-end PCs. Sony Vaios and Lenovo
ThinkPads, for example, are fine laptops. And it’s on high-end
machines like good laptops and powerful PowerMacs — the machines
Apple makes the most profit on — where Apple would be most likely
to lose sales. They can’t say, “Here’s a license for Mac OS X but
you can only install it on low-end machines”, and nor can they sell
Mac OS X licenses for the $400 or $500 profit margins they make on
high-end hardware.

The ’90s Mac cloning program was popular with many Mac users because
they were able to purchase faster computers for less money.2 But Apple was losing money on the
cloning program, and no company can stay in business while losing
money, no matter how happy their customers are. Without question, if
Apple were to offer Mac OS X for generic PC hardware, it’d be an
inordinately popular product. What’s questionable is whether it’d be
inordinately profitable, or even profitable at all.

I’m not going to say it’s impossible that Apple could be successful
with such a plan, but I do think it’s unlikely. And unquestionably
it would require completely changing the company’s business model,
abandoning the current model that has proven to be consistently
profitable for a commodity model of making much less money per
transaction and making it up on volume. Anyone who denies that such
a plan would be risky either doesn’t understand Apple’s current
business model — which is, as repeated ad nauseum herein, selling
computer hardware at 20-25 percent profit margins — or is making
the completely unrealistic assumption that all current Mac users
would continue buying Apple-branded hardware. Remember too that
Apple’s current business model is bootleg-proof; unlike Mac OS X
installer DVDs, you can’t burn copies of MacBooks or iPods.

Why Would Apple Want to Compete Directly Against Microsoft?

Cringely signs off his op-ed with this claim:

[Licensing Mac OS X for generic PCs] would also create
another headache for Microsoft. And that, in the end, is what
Apple does best.

Really? Creating headaches for Microsoft is what Apple does best?
When has Apple ever created headaches for Microsoft? And before
you say “iPod and ITMS”, note that that’s a new market that Apple
conquered first, not a market where Microsoft had already gained a
foothold. If anything, it’s the other way around: historically
Microsoft has created far more headaches for Apple than vice versa.

Microsoft’s biggest headache is the long-delayed Vista, and that’s a
self-inflicted wound.

I think what’s happening is that guys like Cringely and Boutin, who
are tasked with writing about the computer industry at large, have
gotten bored with Microsoft. They still need to write about
Microsoft because it remains the biggest, most influential, and
most profitable company in the industry, but Microsoft has no
threatening rivals. Vista (née Longhorn) is turning out to be one of
the biggest debacles in industry history — they’re shedding
features and it still keeps slipping further behind schedule.
Imagine how far behind schedule they’d be if they were still
planning to include all of Longhorn’s originally slated features.

And yet the Vista debacle isn’t really hurting Microsoft at all,
other than in the technology press. They’re still making money hand
over fist each quarter.

Would it be exciting if Steve Jobs were to stand up at his next
keynote address and say, “We’ve decided to license Mac OS X to any
computer maker that wants it, and our goal is to put Microsoft out
business”? Most definitely. But it’d be exciting in the way that
it’s always exciting to watch someone else do something reckless and
risky.

It’s not Apple’s fault that Microsoft sucks to write about, nor is
it their obligation to put themselves on a collision course against
Microsoft just because it would make for good drama, and thus,
something interesting to write about on the tech beat.

Cocoa for Windows

One more thing-Apple-won’t-do: release a version of Cocoa for
Windows. Back in the ’90s, after Next stopped making its own
computer hardware and turned into a software-only company, they
developed a version of the OpenStep application framework that ran
under Windows (and other OS’s). Shortly after the Apple-Next
acquisition-cum-merger, Apple released a preliminary operating
systems roadmap in which the application framework we now know as
Cocoa was called “Yellow Box”.

The real Mac OS X doesn’t bear much resemblance to these preliminary
plans, which (the initial plans) really amounted to little more than
a revision of NextStep with a classic Mac OS compatibility layer,
which layer was called “Blue Box”. There were no plans for what we
now know as the Carbon APIs — i.e. in these initial plans, there’d
have been Classic for old-style Mac applications, but there’d have
been no way to write native applications other than Cocoa.

Another part of this initial plan was to maintain the cross-platform
Yellow Box libraries, the idea being that developers could write
(what we now know as) Cocoa applications and have them run both on
Mac OS X and on Windows. This wasn’t a pipe dream, Next actually had
this working in the OpenStep era.

Much to the consternation of some developers, this plan was soon
scrapped as well.

Rumors of its resurrection persist, and while I haven’t seen
any high-profile punditry positing its imminent return, I’ve
received a bunch of emails from readers wondering if Boot Camp
somehow means Yellow Box for Windows is coming back.

Viewed through the aforementioned “keep in mind at all times that
Apple’s core business is selling computer hardware” filter, the
answer is clearly no. A Cocoa runtime library for Windows might well
make developers happy, but it wouldn’t help sell Macintosh hardware.

Quite to the contrary, it’d take away one the main reasons people
buy Macs: to run cool Mac applications. If the whole point of the
appeal of Mac OS X is that Mac software is better than Windows
software — or at least better in the eyes of one segment of the
market — what possible good would it do Apple to help that
software run on Windows, too?

The continued existence and success of Mac OS X hinges on the
premise that it is better than Windows. If all or most of the apps
people love on Mac OS X ran just as well (or nearly so) on Windows,
it would lessen the degree to which Mac OS X offers a better
experience. Cocoa for Windows might well prove wildly popular for
some Cocoa developers, but it wouldn’t make money for Apple and
could potentially cost them in hardware sales, so it isn’t going
to happen.

Please don’t argue that Apple would gain hardware sales because
many Windows developers would switch to Cocoa and buy Apple hardware
on which to develop their software. Even if we assume it’s true that
Apple would gain new developers (which is admittedly a reasonably
fair assumption), and that those developers would buy Apple
hardware,3 there just aren’t that
many developers out there compared to the number of civilian users.
It’d be foolish to gain a few new developer customers if it meant
losing many times more regular users who decided that
Windows-with-Cocoa was good enough for them.

“Oh, but then Apple could sell iLife and iWork to Windows users”
isn’t a good argument either, because, repeat after me, Apple’s
primary business is selling computer hardware.

And the best way for Apple to sell more computer hardware is to make
Mac OS X as much better than Windows as they possibly can; nothing
could be further from this goal than releasing a version of Cocoa
for Windows.

Feel free to substitute “Windows and other PC operating systems such as the various Linux-based distributions” for “Windows” if you’d prefer. ↩

Personally, I always thought the Mac clones were pieces of junk, at least the ones from PowerComputing and Umax, and most people I know who bought them regretted it. You got what you paid for, more or less. ↩

Note that this argument — that Apple would profit from Cocoa-for-Windows by selling hardware to former Windows-only developers — presupposes that Apple isn’t going to do the “license Mac OS X for generic x86 hardware” thing. ↩